Fifth Person: 13 Takeaways From Frasers Commercial Trust’s FY2016 AGM

Frasers Commercial Trust (FCOT) (SGX: ND8U) is an office REIT with a portfolio of six commercial office properties in Singapore and Australia. The three office properties in Singapore comprise Alexandra Technopark, 55 Market Street, and China Square Central. FCOT’s overall portfolio is worth around $2 billion.

FCOT first listed on the SGX in March 2006 as Allco Commercial REIT before it was acquired by Frasers Centrepoint Limited in August 2008 and renamed.

Adam Wong, editor-in-chief of The Fifth Person, attended its most recent FY2016 AGM to find out more about FCOT and the office sector in general. Here are 13 things Adam learned from Frasers Commercial Trust’s FY2016 AGM.

1. FCOT’s net property income (NPI) increased 13.4 percent year-on-year. Distribution per unit (DPU) increased 1.1 percent year-on-year to 9.82 cents. DPU has increased for seven consecutive years since 2009 and is at its highest since the REIT IPOed in 2006.

3. Overall occupancy rate is at 93 percent and weighted average lease expiry (WALE) is 3.8 years. FCOT’s top 10 tenants, which contribute 57.2 percent of gross rental income, have a longer WALE of 5.2 years. Microsoft, a top ten tenant, recently renewed its lease at Alexandra Technopark for a further five years to FY2022.

4. However, FCOT’s largest combined tenant, Hewlett-Packard, has one lease expiring in Sep 2017 and another lease expiring in Nov 2017. Both leases are at Alexandra Technopark and comprise 17.5 percent of FCOT’s gross rental income. The leases have yet to be renewed.

6. FCOT’s sponsor, Frasers Centrepoint Limited, is currently developing a new 16-storey hotel at the open courtyard of China Square Central. The hotel is expected to be ready by mid-2019. The hotel is not owned by FCOT but the new addition will help increase human traffic and boost the overall value of the property.

7. FCOT’s gearing ratio is 36 percent and interest coverage ratio is 4.6. Weighted average term to maturity is 2.6 years and 85 percent of loans are at fixed interest rates.

8. One unitholder was understandably concerned about HP’s expiring leases and noted that HP recently moved into a brand-new building at Depot Road. He said FCOT could also face potential competition from Mapletree Business City (which is located around the corner from Alexandra Technopark) and sought an update on the situation. CEO Jack Lam sought to reassure him by stating that HP currently occupies 2.1 million square feet of space in Singapore. HP’s new building at Depot Road only provides 700,000 square feet of space and cannot entirely support HP’s needs.

The CEO then explained that HP restructured itself in 2014-2015 into two different companies with one focused on PC and printers and the other on enterprise solutions. He shared that the management is actively engaging HP to renew their leases but the “dust hasn’t settled” from the restructuring and HP needs more time to set its plans.

9. Another unitholder later asked if the management had plans to upgrade Alexandra Technopark into a business park in order to charge higher rents. He noted that Mapletree Business City (a business park) had an average rent of $5.70-6.50 per square foot whereas Alexandra Technopark only charged an average rent of $3.70 per square foot. He said both properties were somewhat similar and located in the same Alexandra city fringe area. Moreover, there’s a limited supply of new business parks in Singapore over the next few years.

CEO Jack Lam replied that a business park is a proper zoning term under URA regulations and Alexandra Technopark doesn’t have the required land size to qualify. However, he agreed that there’s nothing to stop them from upgrading the property to become more “business park-like”. It seems that the CEO wasn’t speaking from conjecture at all as later that day FCOT issued a press release of plans to revamp Alexandra Technopark to create a new campus environment.

10. The CEO also stated that if a big tenant like HP leaves, FCOT would face short-term pressure in terms of income. However, the management has ways to stabilise DPU for unitholders in the short term. In theory, the management could opt to receive its fees entirely in units in order to conserve cash. Unitholders could also opt to receive their distributions via DRIP (dividend reinvestment plan). Long term-wise, he feels that there shouldn’t be an issue filling up space at Alexandra Technopark as there is a limited supply of high-spec business properties and business parks in the area.

11. A unitholder asked if the ongoing hotel construction at China Square Central was affecting occupancy rates there. Former CEO Low Chee Wah, who now serves as a non-executive director, revealed that the shophouses and ground floor retail spaces facing the worksite are about 75 percent vacant. But the retail podium at China Square Central was doing fine. He also shared that any loss of income directly affected by the construction would be covered by the gains made when FCOT sold the site.

12. A unitholder pointed out that China Square Central’s office rents averaged $6.90 per square foot and 55 Market Street averaged $7.20 per square foot. He questioned why the rents were below the market rate of $7.50 per square foot for grade-B offices in the core CBD area. CEO Jack Lam replied that Singapore office rents were still under downward pressure.

While FCOT will always try to secure the highest rent possible, they have to price it correctly to ensure continuous occupation, especially if a large space is up for renewal and there aren’t many takers. But he added that China Square Central’s office building is still 100 percent occupied and 55 Market Street is a smaller building that contributes 3.5 percent of FCOT’s income and won’t be a big risk to the portfolio – although they are continually doing their best to improve occupancy there.

13. One unitholder noted that the occupancy rate in Central Park, Perth had fallen from 88 percent to 80 percent, while another unitholder pointed out that rental reversions there fell 4.2 percent. CEO Jack Lam explained that Perth’s economy owes a lot to the mining industry. The commodity cycle has been on a downtrend the last two years and this has put downward pressure on the economy and occupancy rates in the city.

However, he viewed that Central Park is among the top five office buildings in Perth in terms of location and building quality, and there is still demand high-grade office space there. (At 249 metres, Central Park also enjoys the status of being the tallest building in Perth.) He revealed there have been a number of active enquiries for leases for Central Park and things should start to improve moving forward.

As an add-on, he shared that leases in Australia tend to be longer with step-up rents while leases in Singapore are usually shorter with no step-ups.

This article originally appeared on The Fifth Person, authored by Adam Wong, the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller’s List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller’s List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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